ITC ruling could weaken patentees' rights

A vicious patent war is raging. Apple, Sony, Motorola, HTC, Samsung and others involved in the smartphone industry are asserting that their rivals are infringing their patents, and they are filing numerous actions against one another in order to stop the sale of their competitors’ allegedly infringing smartphones.

But obtaining an injunction against a patent infringer isn’t easy. Following the U.S. Supreme Court’s 2006 decision in eBay v. MercExchange, which toughened the standard for granting such injunctions, the courts have become much more hesitant to enjoin ongoing infringements.

So a growing number of patentees, including those in the smartphone wars, have brought their legal fights to the International Trade Commission (ITC). The ITC acts far more swiftly than the courts, and if it finds any infringement, no matter how small, it prohibits further imports of the infringing products.

Recently, however, the ITC has been criticized for issuing exclusion orders whenever it finds infringement. Some academics have called on the ITC to take a more flexible approach, as has the business-friendly editorial board of the Wall Street Journal.

The ITC may have taken this criticism to heart. In late December 2011, the agency found that some HTC smartphones violate one of Apple’s patents, but the agency refused to immediately enjoin the import of HTC’s infringing phones. Instead, the ITC delayed its enforcement order for up to one year.

This decision—In re Certain Personal Data and Mobile Communications Devices and Related Software—is a major departure from past ITC practice. And it “may signal an important shift,” says Kelly Kubasta, a partner in Klemchuk Kubasta.

If it is a harbinger of future ITC rulings, as many believe, it will significantly weaken patentees’ rights, give greater protection to alleged infringers and discourage many patentees from bringing their infringement claims to the ITC. It also will push smartphone companies and other patentees to fight one another, not in the ITC or the courts, but in the marketplace.

Significant Step

The ITC is not required to stop the import of infringing products. On the contrary, when the agency determines some product infringes a U.S. patent, it must consider the public interest before it can exclude further imports of the infringing product. The ITC is required, by 19 U.S.C. Section 1337(d)(1), to take into account “the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers.”

In the past, this public interest factor has had little effect on the ITC’s actions. When the agency has found a product to be infringing, it has almost invariably issued an immediate exclusion order.

However, many experts believe the ITC is changing its ways. The decision in the HTC case “is a significant step in the ITC’s evolving treatment of patent owners and accused infringers,” says Professor Colleen Chien of Santa Clara University Law School. “[The ITC’s commissioners] are showing a greater interest in both the public interest and tailoring their remedies. They are looking at ways of implementing exclusion orders that minimize the impact on competition and the public.”

Such a move by the ITC would answer critics who argued that the agency’s policy of automatically barring infringing imports is too harsh, resulting in undue harm to the consumers, third-party businesses and competition.

A policy shift also would better align the agency with the courts’ stance on granting injunctions against patent infringers. “It creates a situation where the ITC is not as much of an outlier,” says Professor Arti Rai of Duke Law School.

Taking Notes

If the HTC decision is indeed an indicator of things to come, it offers lessons on how companies can argue for and against restrictions on exclusion orders. First, the ITC stated in its ruling that because of “competitive conditions in the United States economy,” it would allow HTC to import new infringing smartphones for four months, so as “to provide a transition period for U.S. carriers.”

The ITC was concerned that an immediate ban would hurt some third-party telecommunication providers and harm competition in that market. “T-Mobile alleged [an immediate import ban] would have a huge impact on its competitive position,” Chien says.

Second, in order to protect U.S. consumers, the ITC allowed HTC to import “refurbished” infringing smartphones for one year, “to be provided to consumers as replacements under warranty.” The agency feared that prohibiting HTC from replacing defective phones under warranty would hurt many innocent consumers. “These products are integral to consumers’ everyday life in the U.S.,” says Kubasta. “When that happens, the public interest in using those products increases.”

In the future, therefore, an infringer seeking to limit the scope of an ITC exclusion order should provide detailed evidence of how the exclusion order would affect third-party businesses and competition in the U.S. market. The infringer also should show how many consumers would be affected and how badly these consumers would be affected, Kubasta says.

Facing Factors

The HTC decision suggests several other factors that could lead the ITC to restrict its exclusion orders. In the HTC matter, the company’s smartphones were found to violate only two claims of a single patent. Those claims concerned only a small aspect of HTC’s phones, and there was good reason to believe HTC could quickly design around these patent claims.

The ITC may take such considerations into account in future cases. It may delay import bans “in situations where the number of infringed patents is small, a design-around is fast, and the patents represent only a small piece of the [infringing] product,” Rai says.

However, this is likely to help infringers in only certain industries, says Professor Jonas Anderson of American University’s Law School. That’s because companies in some sectors can implement a design-around quickly and easily, while companies in other sectors can’t. For instance, software firms and industries relying on software often can swiftly design around software patents. Hardware makers, by contrast, generally require far more time and effort to design around hardware patents.

Another possible factor is the amount of harm a patentee would suffer if an exclusion order were delayed or otherwise limited. In the HTC case, Apple’s U.S. revenues would suffer relatively little because two claims of one patent would continue to be infringed for a short period.

“If a patentee’s domestic industry will be harmed by a delay [in the exclusion order], the ITC is unlikely to delay. I think that will be the major factor in the ITC’s decision,” Anderson says.